Rail pricing in a post-coal market

Out of sight of most of us, the railroad industry is scrambling to maintain profitability in a rapidly shrinking market. Shippers can assume that the railroads will be looking to raise prices in other commodities to make up for a continuing rapid decline in coal revenues.

The U.S. Energy Information Administration (EIA) stated recently that U.S. utilities have cut their consumption of coal by half since 2008—and keep in mind that 70% of that coal had moved by rail.

In the meantime, New York state expects to have zero coal-burning utilities by 2024, while DTE Energy in southeastern Michigan has just agreed to install pollution controls or convert to natural gas at five large coal-fired units under a court settlement with the U.S. Environmental Protection Agency. This move, together with New York and other states transitioning to gas and renewables, will increase pressure on coal producers and transporters.

According to the American Association of Railroads (AAR), coal accounts for just under a third of originated tonnage for U.S. Class I railroads—far more than any other single commodity. However, coal accounted for about 15% of rail revenue, second in percentage to intermodal.

Thus, it represents a huge volume, meaning lots of railcars, miles and equipment for relatively low margins. And the pricing is not getting any better. Railroad rates for coal are $10 per ton below where they were in 2008 according to the EIA—about a 22% drop in 11 years.

Through the end of 2019, the price of domestic and imported coal were falling before the pandemic reduced consumption of energy and brought commerce to a near standstill. Inventories are near record highs for coal, and current actions by customers will further reduce utility coal consumption, even beyond the low price for natural gas.

Overall, coal production and consumption outlook remains bleak. According to the EIA, interior region production is projected to account for more than 20% of production in coming years, up from 13% of coal production 12 years ago. This increase in share reflects the interior region’s growing competitive advantages compared with other U.S. coal-producing regions, despite the higher sulfur content of its coal.

While interior basin coal will need the railroads to reach many utilities and ports, this is “dirty coal” said to be responsible for urban pollution in Asia. And as coal-related pollution chokes cities in India and China, they will push for alternatives as few expect this U.S. export volume to be sustained.

The major eastern railroads’ (Norfolk Southern and CSX) coal freight prospects are mostly dependent on coal production in the Appalachian region. Burlington National Santa Fe and Union Pacific depend on coal shipments originating from the interior Powder River Basin region.

As mines close due to lower consumption and lower prices, railroads will look for price increases in intermodal where possible, but this mode must remain competitive with highways. The real pressure will be on captive shippers with private railcars.

There had been an expectation of oil volumes picking up the slack in coal, but at recent low prices that commodity might not help the bottom line. Shippers should be watching the energy sector and become familiar with the possible ripple effects of a post-coal transport market.